European government bond prices fell due to rising debt, political instability, and tariff threats. Stocks declined, while the euro rose, and Brent crude prices gained.

Government bond prices across Europe are falling, driven by rising defence spending and increased debt issuance, compounded by political instability and Trump’s tariff threats, which dampen investor demand. Equity markets posted negative results, with all indexes declining except Italy. Year-to-date, the top-performing sectors have been banking, aerospace, and defence stocks. The euro strengthened by 0.35% against the US dollar. Brent crude prices rose 0.28%, supported by new US sanctions on Iranian oil and Hong Kong-flagged vessels linked to Iran's shadow fleet. However, oil demand faces pressure amid escalating global trade tensions, following Trump's threat of a 200% tariff on European wines and champagne.

Eurozone industrial production rose 0.8% in January, with Germany leading, but weak demand, high costs, and geopolitical risks cloud recovery prospects despite some stabilization.

Eurozone industrial production rose by 0.8% in January, suggesting potential stabilization after a prolonged decline, with Germany leading the gains. Despite improvements in sentiment, challenges such as falling orders and employment persist, and full recovery remains uncertain. While stronger capital and intermediate goods production contributed to the rise, energy and consumer goods output declined. Germany's industrial sector rebounded by 2% in January, driven by car manufacturing, though overall production remains below pre-pandemic levels. Weak demand, high costs, geopolitical risks, and regulatory uncertainty continue to hinder a robust recovery, despite proposed fiscal stimulus. The outlook for industrial production remains fragile, with modest medium-to-long-term growth anticipated, but risks such as tariff uncertainty and external demand weakness could limit significant improvement.

Eurozone industrial production rose 0.8% in January, signalling possible stabilization, with Germany leading gains. Recovery remains uncertain despite improving sentiment and potential future investment boosts.

Eurozone industrial production increased by 0.8% MoM in January, reinforcing hopes that the prolonged decline in output since 2023 may be bottoming out, though the timing of a full recovery remains uncertain. The January production level, the highest since August, was primarily driven by stronger capital and intermediate goods production, while energy and consumer goods output declined. Germany led the gains, while France (-0.6% MoM) and Spain (-1.0% MoM) experienced contractions. Although manufacturing surveys have become less negative, firms continue to report falling orders and declining employment, indicating that a full recovery is still distant. However, the stabilization suggested by the latest data aligns with the improving sentiment, offering a glimmer of optimism after two years of industrial recession. Looking ahead, the outlook for industrial production is shifting, with potential support from increased pan-European defence spending and German infrastructure investment, though these measures will take time to translate into tangible growth. While a significant rebound in 2025 appears unlikely, the recent developments signal that the worst may be over, even if the path to sustained recovery remains uncertain.

We expect a slight rebound in the medium-to-long term due to defence spending; however, tariff uncertainty remains, and potential Trump tariffs could pose challenges for industrial production.

Germany’s industrial production rebounded in January, signalling stabilization, but weak demand, high costs, and geopolitical risks cloud recovery prospects despite proposed fiscal stimulus and policy uncertainty.

Germany’s industrial sector showed signs of stabilization in January, with a 2% MoM rebound in production, surpassing expectations and reversing December’s decline. This growth was largely driven by a resurgence in car manufacturing, though overall production remains 1.6% lower year-on-year and about 10% below pre-pandemic levels. Meanwhile, exports fell 2.5% as businesses halted frontloading ahead of anticipated U.S. tariffs, while imports rose 1.2%, narrowing the trade surplus. Despite this modest improvement, manufacturing capacity utilization is near financial crisis-era lows, inventory levels remain high, and order books continue to shrink, particularly due to weak foreign demand. Additionally, energy costs, supply chain disruptions, and weak global demand continue to weigh on Germany’s manufacturing competitiveness. Structural challenges, including geopolitical risks, regulatory uncertainties, and the potential relocation of production to the U.S., further cloud the short-term outlook. While the incoming government’s proposed fiscal stimulus could provide a temporary confidence boost, its effectiveness in driving a sustained recovery will depend on implementation speed, business sentiment, and broader global economic conditions. Without stronger investment and a rebound in external demand, Germany’s industrial sector may struggle to regain its historical strength in the near term.

We expect that industrial production remains fragile in the near term, with persistent challenges such as weak foreign demand, high energy costs, and geopolitical uncertainties limiting sustained recovery.